How does China’s fixed asset investment keep growing at 30% per year?
The world GDP grows at 5% a year or so, but China’s fixed asset investments keep booming at 25-30% a year, year after year, as we have discussed many times in the past (notably here). WSJ:
In recent months the central bank has raised interest rates and taken other steps in an effort to curb economic activity. But Thursday’s fixed-asset investment data are the latest in a string of indicators this week, including bank lending and money supply, that showed the economy continues to expand at a brisk pace.
China’s urban investment in factories and other fixed assets in the first five months of this year rose 30.3% from the year-earlier period, faster than the 29.6% gain posted in the first four months of the year. The five-month rise in investment was also stronger than the 28.9% pace forecast recently by economists in a Dow Jones Newswires survey. The fixed-asset figure for May alone increased 31.9% from a year earlier, a pickup from April’s expansion of 29.3%.
China is targeting an 18% expansion in national fixed-asset investment this year, which would mark a slowdown from the 25.7% recorded last year. Urban fixed-asset investment makes up a large portion of the national figure.
We just don’t get it. This picture does not add up. The world GDP grows a few percent per year, and suffers occasional recessions. Yet China grows 9-10% per year in an unbroken string of increases over two decades long. Its capital investment accounts swell by 25-30% per year, the incremental productivity of those increases in investment continues to diminish, and yet the gravy train does not end.
The Chinese are obviously a hard-working, entrepreneurial and intelligent people, but this performance is by far the greatest miracle of economic development in the history of the world. And it has not once faltered significantly in 20 years, unlike the booms and busts of the great American expansion. We once speculated that China’s banks are its Roaring Twenties stock market. The recent revision from $400 billion to $1.2 trillion in bad loans at China’s banks might tend to support this thesis, but China’s growth just never seems to slow down, let alone stop.
June 18th, 2006 at 2:50 pm
I have great concerns about China’s economic and thus political future. The bad loans are a huge problem – their version of the S&L crisis – and on a scale that is difficult to comprehend. Moreover, I suspect a lot of the “investment” they measure is reinvestment of profits by foreign corporations who are not allowed to repatriat the bulk of their profits. This fact I also suspect is linked to China’s refusal to allow its currency to float. If they did, the yuan may go up in the short term, but companies would use currency contracts to get money out of the country ultimately forcing the yuan down and putting a real pinch on “real assest investment” not to mention drying up some of the money supply that is vital to service the mountain of bad debts held by the state banks.
June 18th, 2006 at 6:33 pm
Many intelligent companies are growing by about 30% per year for the past five years or so, averaged out. Boeing, Catepillar. Basically companies that make actual physical stuff and aren’t infected with unions or other stupidity.
The world economy includes such economic giants as Etheopia, NK, Saudi Arabia, Algeria, ect ect. Most of it isn’t driven by industry like the still capitalist west, but rather by less productive ideology, tribalism, welfare statism and the preservation of aristocracy.
China is industrializing, and they have an enourmous population to industrialize. People are still pulling themselves up into a new middle class as fast as the opportunity to do so presents itself. Assuming their state continues to loosen their grip, they could become an economic superpower on their massive population of industrious laborers alone. Not to mention that they’re sucking in machining knowledge and capital like a black hole.
I think we need to consider the possibility that their growth is all real, and what we’ll have to do to compete.
June 19th, 2006 at 4:22 pm
Ernst and Young have withdrawn that report because
See here and here and here.